Bridging loan to development finance with some mezzanine funding
Construction and development projects are often funded using some method of short term finance. This is because the finance is only required to help fund the purchase of the land, any existing buildings and the build cost, then once the project has been completed the new development will either be sold or refinanced and rented out. If keeping a development to rent out, refinancing is usually required because a suitable long term method of finance will be required. The long term finance facility, such as a commercial mortgage, can’t be put in place at the beginning because of the nature of the security property. Long term finance facilities require completed developments.
Because development funding is therefore only required for a short period of time finance is often raised through the use of bridging loans. These bridging loans can be secured on any property that the developer owns and would like to use as security, including the development itself. Bridging loan providers are usually flexible about the type and condition of the security property, which combined with the short term nature of bridging finance, makes this a popular option for developers.
Another alternative is development finance which is specifically designed to facilitate funding new construction and development projects. The main advantages of development finance are that funds are released in stages as the development progresses. This is beneficial because interest is only charged on the money that has been released. In addition this type of facility enables more capital to be released than with other options, because it takes into consideration the increasing value of the development as work progresses.
For developments where there is a very limited amount of capital available from the developer an option known as mezzanine finance may be available. Mezzanine finance providers will lend on a second charge basis behind the first charge lender. They may lend to very high loan to values depending on the project. Mezzanine finance will usually have a nominal interest charge, but the agreement with the mezzanine lender will normally be based on them having a share of the project’s profits. The higher the amount of money invested by the mezzanine lender, the greater the risk, then the higher their share of the profit.
Mezzanine finance is normally only available to experienced builders, and to obtain this form of finance a lender will need to be attracted to the project and confident with the ability of the developer.